Gazumping – What You Need to Know!

No doubt, most people have heard of the term ‘gazumping’ and have either experienced it first hand, or know someone who has been gazumped in a real estate transaction.

Despite what may be familiar to most people, to avoid any confusion or misconceptions, let’s start with the most basic of questions on the topic of gazumping; what is it?

We’ll cover this, along with a lot more on this topic below.

Please bear in mind, while you read this article, that we have written this blog based on Real Estate laws in NSW, so some laws and processes may differ in other states and territories.

What is Gazumping?

NSW Fair Trading defines this quite succinctly, stating that “gazumping occurs when an agent or seller accepts an offer you make to buy a property at an agreed price but the property is sold to someone else.”

When does Gazumping Occur?

This most commonly happens due to another party making a higher offer on the property. While it may seem unethical or amoral to the buyer who has been gazumped, a perspective that is not unreasonable, you must bear in mind that an agent is legally obliged to submit any and all offers to a vendor. Even from an ethical standpoint, considering this from the perspective of the vendor, if you are selling your property and there is a better offer put forward by a buyer, would you not want to be aware of that?

It is understandable that when a buyer it gazumped, they feel frustrated. Most buyers, once they have decided that ‘this is the right property for them’ have some level of internal commitment to the purchase and even though they have not made their purchase formal by exchanging a contract, it is normal that they feel they have already emotionally bought the property.

The frustration felt then by missing out on something they felt was ‘theirs’ is why gazumping is talked about with real emotion and passion by those who have experienced it firsthand. That feeling of injustice at missing out is accompanied by a conclusion that such action must be illegal, unconscionable or at least unethical. As explained above, while this is not an illogical conclusion to draw from one perspective, it is not accurate.

Communication is Key

However, we believe all agents have a responsibility to communicate very clearly through the sale process goes a long way to avoiding misunderstanding and/or assumption. As with most things in life, good communication is key!

Gazumping is most prevalent in a booming market, as there is usually a lot more competition from prospective buyers. When there is a lot more competition in the market (whether for commercial property or residential property), inevitably buyers miss out on an opportunity to purchase a property they want (if not multiple properties). This usually leads to buyers becoming more aggressive in their purchasing tactics, as they become unwilling to miss out on yet another opportunity. In this environment, there are many buyers prepared to put in aggressive offers and to act quickly, in effect creating a type of bidding environment, or an environment very conducive to gazumping.

Imagine that you have just found the ideal property, after having missed out on (maybe multiple) other opportunities, and the agent tells you that the owner has just accepted another offer already. Would you step away to allow the other buyer the unchallenged chance to purchase the property, meaning you miss you yet again, or would you act quickly and try to offer more favourable terms to secure the property for yourself?

Competing and winning is something that has been drummed into all of us since childhood, so it should come as no surprise to any of us that in a competitive market, this behaviour plays out, creating buyers who win and buyers who get gazumped. This is by no means a judgement of the behaviour one way or another, that is for moralists and philosophers to debate, this is merely recognition of the human condition.

Tips to avoid being Gazumped

This is just a short list of key points to remember to give yourself the best chance of purchasing the property and avoid being gazumped.

Be in a position to act quickly

Have your finance ready, your deposit ready, and the ability to complete your due diligence quickly. Have your purchasing entity information confirmed (i.e. if buying in a company or a trust, don’t wait to get this setup once you find the right property.

Have it setup and ready to act), and have a solicitor or conveyancer ready to act quickly on your behalf. The faster you are in a position to exchange a contract, the more limited your chance is of being gazumped. Exchange is the binding, legal commitment to the agreement by both parties.

Put your offer in writing (there is no problem making an offer verbally, but it is best to also put it in writing)…

Without delay, including any terms you may be looking for (such as reducing the deposit from 10% to 5%, the vendor having to attend to some works at the property etc), and also give advice on when you believe you would be in a position to exchange the contract if your offer is accepted.

The vendor knowing that you can act quickly will work in your favour when they are considering your offer. Putting the offer in writing shows you are serious, and outlining any terms and when you can act leaves few or no questions for the vendor, so they have little or no uncertainty about your offer, making it simpler for them to make a decision.

Ask for an exclusive dealing period…

From the time your offer is accepted in order to allow time to exchange a contract without being gazumped. Remember though, while this may give you better protection if the vendor agrees to give you an exclusive dealing period, this will likely not provide you with any real legal protection from being gazumped.

It’s better than not having the agreement, but don’t fall into the trap of thinking you cannot be gazumped in this situation. You still need to use your best endeavours and get that contract exchanged ASAP.

Ask if you are competing with another buyer

Sometimes, if two buyers present the same, or almost the same, offer to the agent, a vendor may agree to sell to either buyer and effectively put them both in a race to exchange a contract. They may also instruct the agent to notify the respective buyers of their competition, giving them the opportunity to improve on their offer to give the vendor an outright, easy decision to make.

In either instance, your agent should communicate this clearly with you. However, as agents are humans, they are fallible and may not communicate as well as you would like. Take some control over the situation and ask them if you are competing with another buyer to exchange a contract and keep in communication with your agent to keep asking if the situation has changed.

Do your due diligence early

If a Contract is available, seek a copy straight away to start your review. If any other documentation (such as a lease if the property is tenanted) is available, such as building reports, contamination reports, asbestos reports, pest reports, ask for copies and review early in the process.

This will help you to determine quickly if the property is suitable and will limit the time needed to complete final due diligence before you can exchange a contract, if you make a successful offer.

Gazumping Resources:

NSW Fair Trading offers some great advice and tips on gazumping on their website at this link.

If you would like to discuss more on this topic, or if we can help you with your search to purchase a property, please call one of our agents today.